Mutual Fund News

For greater diversification, look beyond Canada

Seeking dividend income outside of banks or resource producers? Here are five picks from one fund manager

By JOHN HEINZL

Monday, November 9, 2009

INVESTMENT REPORTER

Canada is a wonderful place to be a dividend investor - if you don't mind owning a lot of banks, pipelines and resource producers.

But if you crave exposure to other sectors such as health care, consumer products and technology, it pays to look beyond Canada's borders.

That's what Ian Riach spends his days doing as lead manager of the Bissett Multinational Growth Fund, a dividend-oriented mutual fund with about $112-million under management as of Sept. 30.

"We look at this fund as being a diversifier away from Canada," he says. "In Canada we do a lot of things really well but it's a very concentrated market - materials, resources, energy and some solid financial institutions."

When selecting companies, Mr. Riach gravitates to those with a high dividend yield, low payout ratio (dividends divided by net income) and a consistent record of paying - and ideally, increasing - dividends. He also looks for a high return on equity, a solid balance sheet and a reasonable valuation.

The fund hasn't exactly shot the lights out - the three-year return is negative 6.9 per cent, which compares with negative 5.1 per cent for the MSCI World index.

But the fund has bounced back with an 18.6-per-cent gain over the past six months as equity markets recovered from the financial crisis, compared with a 21.1-per-cent advance for the MSCI World, according to GlobeFund.

Here's a look at five of the fund's top holdings. All of these stocks can be purchased by Canadians, either directly or through American Depositary Receipts. Be sure to do your own due diligence before investing in any security.

Microsoft Corp.

The dude in the Mac commercials may not give Microsoft a lot of respect, but Bill Gates's evil empire still dominates the global operating system market and the new Windows 7 is shaping up as a winner.

Microsoft has a bulletproof balance sheet - including $8.8-billion (U.S.) in cash and cash equivalents - and its payout ratio is a puny 31 per cent.

"So the dividend is not only sustainable ... the company could easily increase their dividend," Mr. Riach says. The stock currently yields about 1.9 per cent.

The shares have already had a huge run, closing yesterday at $28.47, up from a low of $14.87 in March. So it's not like Microsoft is a well-kept secret. But it trades at a multiple of about 16 times estimated current-year earnings, which is roughly in line with the market.

Nike Inc.

Nike's dividend yield of 1.6 per cent may not turn many heads, but its dividend growth rate, averaging 20 per cent annually over the past five years, is what caught Mr. Riach's eye - that, and the $3.6-billion of cash and short-term investments on its balance sheet.

"Nike kind of became really dividend friendly over the last five years and that's what made it attractive to us," he says.

Even as other companies are cutting their dividends or holding them steady, Nike hiked its divvy last November and is expected to push through another increase this month, according to Bloomberg estimates.

And more increases should follow: Powered by growth in China and other foreign markets, the athletic shoe and apparel company's profits have been climbing at an annual clip of nearly 15 per cent over the past five years.

BP PLC Even after a 73-per-cent jump in the stock since March, British petroleum and petrochemicals giant BP yields a rich 5.8 per cent. That's nice, but such a high yield also reflects some risks.

BP has been trying to squeeze more efficiencies out of its refining and marketing operations, which account for 80 per cent of its revenue. And while it's made some progress by trimming staff and closing unprofitable service stations, there's still work to be done.

"The refining and marketing side is a very thin margin business and it really turns on costs. You've got to control costs and they just weren't. Now they're trying to," Mr. Riach says.

Another concern is the dividend payout ratio, which is a relatively high 62 per cent. "There's always the risk of a [dividend] cut, especially with a company that's going through a restructuring to try to save on costs and preserve cash flow, but I think they would have done it by now if they were going to do it," he says.

Canon Inc.

When Mr. Riach looks at Canon, he sees a lot of number he likes: A dividend yield of 3 per cent, a five-year dividend growth rate of 25 per cent, and a "very reasonable" price-to-book ratio of 1.7.

Another valuation measure he studies is the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization. Canon's EV/EBITDA multiple is seven, which he finds compelling considering the company's dominance in printers, cameras and copiers, as well as industrial and medical imaging equipment.

"Anything south of 10 for a company like this would be very attractive," he says.

Japan-based Canon has also done a good job of containing costs, so when the global economy revs up again, its profits will benefit.

But it hasn't been immune to the global recession, as illustrated by this week's announcement that J&J is laying off about 7 per cent of its work force in a bid to save up to $1.7-billion annually.

In addition to the weak economy, the company has also been hurt by generic competition to two of its key drugs, schizophrenia medication Risperdal and the epilepsy treatment Topamax, which contributed to a 5.3-per-cent drop in third-quarter revenue.

But Mr. Riach still likes J&J, which has increased its dividend for 47 consecutive years and is one of the few U.S. companies that still commands a triple-A credit rating.

"Last quarter's numbers were a little sloppy, but we're in a sloppy economic environment so to me that shouldn't have been unexpected," he says.

J&J's stock has rebounded along with the market, but its shares, which closed Friday at $60.30, still trade well below their high of more than $72 before the financial crisis. And with a price-to-earnings multiple of 13 based on 2009 estimates, they trade at a discount to the S&P 500's P/E of about 17.

"For a company of its stature I would say it should at least command a market multiple," he says.